A senior EU source said the rebate would go if the UK sought to extend the transition beyond 2020. That is because the UK is required to contribute to EU coffers during the transition period, but by 2021 Brussels is expected to have revised its budget without the UK.

The EU27 aim to agree a new budget for 2021-7, a decision that will be taken without the UK. This requires a revision of the EU’s “own resources decision”, the law that enshrines the British rebate.

Theresa May has said she wants a transition period of around two years, but in a paper released on Wednesday the government said it should be “determined simply by how long it will take to prepare and implement the new processes and new systems that will underpin the future relationship”.

Staying in the single market and customs union

The UK could sign up to all the EU’s rules and regulations, staying in the single market – which provides free movement of goods, services and people – and the customs union, in which EU members agree tariffs on external states. Freedom of movement would continue and the UK would keep paying into the Brussels pot. We would continue to have unfettered access to EU trade, but the pledge to “take back control” of laws, borders and money would not have been fulfilled. This is an unlikely outcome and one that may be possible only by reversing the Brexit decision, after a second referendum or election.

The Norway model

Britain could follow Norway, which is in the single market, is subject to freedom of movement rules and pays a fee to Brussels – but is outside the customs union. That combination would tie Britain to EU regulations but allow it to sign trade deals of its own. A “Norway-minus” deal is more likely. That would see the UK leave the single market and customs union and end free movement of people. But Britain would align its rules and regulations with Brussels, hoping this would allow a greater degree of market access. The UK would still be subject to EU rules.

The Canada deal

A comprehensive trade deal like the one handed to Canada would help British traders, as it would lower or eliminate tariffs. But there would be little on offer for the UK services industry. It is a bad outcome for financial services. Such a deal would leave Britain free to diverge from EU rules and regulations but that in turn would lead to border checks and the rise of other “non-tariff barriers” to trade. It would leave Britain free to forge new trade deals with other nations. Many in Brussels see this as a likely outcome, based on Theresa May’s direction so far.

No deal

Britain leaves with no trade deal, meaning that all trade is governed by World Trade Organization rules. Tariffs would be high, queues at the border long and the Irish border issue severe. In the short term, British aircraft might be unable to fly to some European destinations. The UK would quickly need to establish bilateral agreements to deal with the consequences, but the country would be free to take whatever future direction it wishes. It may need to deregulate to attract international business – a very different future and a lot of disruption.

The senior EU official said this was a sign the British were not ready and were not capable of wrapping things up in 2020.

The 21-month Brexit transition period is said to be the brainchild of Martin Selmayr, the chief of staff to Jean-Claude Juncker, the European commission president. Selmayr, who is already seen as a powerful figure in Brussels, was promoted on Wednesday to become the commission’s top senior civil servant from 1 March. The 2020 end date, which overlaps with the end of the current seven-year budget, was backed strongly by France and Germany, but some member states wanted more flexibility.

EU insiders said before the June 2016 referendum that it would take about five years to negotiate a trade deal with the UK. Some diplomats think the 21-month transition is not long enough.

The EU is expected to include an option to extend the transition in the Brexit withdrawal text. The first complete draft of the Brexit treaty is likely to be discussed by EU ambassadors next Wednesday.

The end date is only one area the UK disagrees with the EU on the transition. Other disputes include the cut-off date for allowing EU citizens to retain full rights in the UK, and the role of the European court of justice.

In 2015 the UK paid £10.8bn to the EU budget, but this would have been £15.7bn without the rebate.

Thatcher was lionised by Tory Eurosceptics after she secured the discount in 1984, although France remembers the decision as a defeat for the British because the Tory leader had wanted an even bigger chèque britannique. The European budget at that time was spent on farmers, a tiny part of the UK economy.

As the UK became richer relative to other member states, the rebate led to resentment. Austria, Germany, the Netherlands and Sweden were given a rebate on their contributions to the British rebate in 2014.

The European commission wants to sweep away all rebates that have made the EU budget eyewateringly complicated to administer and difficult to explain to the public.

A UK government spokesperson said: “Negotiations on the terms of the implementation are ongoing.

“We have been clear about the need for this period to have a strict time limit, guided by how long it will take us all to prepare and implement the new processes. We believe that this should be in the region of two years.”